4 Restaurants That Take Dividends Seriously

Includes: CBRL, DRI, MCD, YUM
by: The Dividend Pig

Restaurants are generally pretty bad businesses. High overhead costs, a product with a shelf life of only a few days, and finicky customers who are always looking for the newest hot spot. I've worked with a number of chefs and restaurant owners over the years, and many are lucky to break even. Like they say, the fastest way to lose your shirt is to open a restaurant.

But not all establishments have succumbed to the fierce competition present in food service, and a select few have managed to consistently reward shareholders with a growing stream of income year after year. It's not easy; it requires discipline, tight cost control, a name that people trust, and above all, an establishment customers will return to regularly.

Here are four restaurants that I've recently analyzed, and are potential candidates for investment.

McDonald's Corporation
(NYSE: MCD) franchises and operates McDonald’s restaurants around the world. This place is the granddaddy of the successful franchise, and those golden arches still bring in the bucks. Revenue was up 5.9% in 2010, and I expect a nice increase in 2011, with 1,100 new stores planned for opening. Over 30 years of dividend increases, and more on the way. Expect dividend growth in the next few years in the 10-15% range, and the dividend is plenty safe at only 49% of earnings. You will pay a premium for such a restaurant stalwart, but I will continue to add to my position on dips under $74.

Yum! Brands Inc.
(NYSE: YUM) is the world’s largest quick service restaurant company, with more than 37,000 units in more than 110 countries and territories. YUM’s portfolio includes 3 brand concepts: KFC, Pizza Hut, and Taco Bell. Spun off from Pepsi Co. in 1997, Yum! has quickly made a name for itself in the restaurant business. Sales growth averaging 5.5% over the past decade, with great earnings and dividend growth as well. Yum! is betting heavily that China will be the engine for future growth, with 36% of new stores opened in 2010 on the mainland. A combination of strong earnings growth and an increased payout ratio has skyrocketed the dividend over 20% a year for the past 5 years, though the current yield of 1.96% will be to low for most dividend growth investors. Debt is also high, but still manageable, and necessary for the pace they are moving. I'll show more interest if the price dips into the low 40's, rather than the $51.12 it is now.

Darden Restaurants Inc. (NYSE: DRI) is the world’s largest full service, owned and operated restaurant company. Brands include The Olive Garden, Red Lobster, Longhorn Steakhouse, The Capital Grille, Bahama Breeze, and Seasons 52. As of May 30, 2010, DRI operated 1,824 restaurants in the US and Canada. Sales were down 1.5% in 2010, but DRI showed impressive revenue growth during the recession (where dining out is often the first luxury to go) averaging 7.3% over the past 5 years. Fiscal year 2011 ends in May, and revenue should be up about 5.5%, aided by 70-75 new restaurants. Dividends have only had consecutive yearly growth since 2006, but many of those years had 25%+ increases. The balance sheet isn't stellar, but debt should not be an issue for this company. The current price of $47.69 carries a p/e of 16.9 and a yield of 2.7%, which isn't a steal but is fair. I'd like to see a longer history of dividend increases, but I'm definitely watching this stock.

Cracker Barrel Old Country Store, Inc. (NASDAQ: CBRL) operates a chain of restaurant/retail concepts under the Cracker Barrel Old Country Store brand. As of September 21, 2010, it operated 595 full-service restaurants and gift shops in 41 states, most located in the Southeast US. This company offers a two-fer to investors - both a restaurant and retail outlet in one. The slowest growing and lowest yielding of the stocks mentioned; average revenue growth of just 2.3% a year and a yield of 1.8%. Cracker Barrel has been adding units at only 1-2% annually, far below that of mega-brands YUM and MCD. It was not until 2003 the company got into the increase-the-dividend-every-year game, but since then growth has averaged 11.9%, though 2010's increase was only 2.6%. Definitely the weakest stock of those mentioned, but it may make an interesting play if you think the baby boomers will take to the roads in their RV's - CBRL specializes in RV friendly parking, and has been voted most RV Friendly Sit Down Restaurant in America 9 years running.

Disclosure: I am long MCD.